Newly private Dell to have many challenges

SPOTLIGHT ON TECHNOLOGY

Aaron Ricadela and Peter Burrows

Published 8:43 pm, Wednesday, February 6, 2013

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Newly private Dell to have many challenges

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Now that Michael Dell has clinched a deal to take his company private, he faces the bigger challenge of turning a business falling behind in personal computers into a provider of high-margin cloud computing tools and services.

Dell, 47, gains greater freedom to cut jobs and embark on strategy shifts at Dell Inc. without answering to public shareholders. Still, the buyout imposes constraints, including saddling the company with $17 billion in debt.

Interest payments will eat up cash that could be spent on acquisitions and research and development to take on IBM, Hewlett-Packard and Oracle. That may also force Dell to keep its PC division, which drags on margins.

"It's a double-edged sword," said Bill Whyman, an analyst at ISI Group. "They don't have the balance sheet to go up against IBM, HP or Oracle. Those companies spent billions of dollars to change the mix of their businesses."

Dell and Silver Lake Management are taking the Texas computer maker private in a transaction valued at $24.4 billion. Dell is regaining majority control of the company he started in a university dorm room, and will remain chairman and chief executive officer.

Software push

A quarter-century after its premiere as publicly traded company, Dell's in a tough spot. The PC maker has spent $12.7 billion to buy 18 companies since 2009, including Compellent Technologies in data storage and Force10 Networks in networking. Yet Dell isn't bundling enough of those highly profitable products with the computer servers it sells. That would help it better cope with a PC sales slump.

In software, a $1.5 billion business, Dell needs to make a bigger splash in cloud computing tools for companies managing fleets of servers, networking gear and business applications online, without hiring teams of expensive consultants.

That could help Dell sell more software to midsize companies and enterprises seeking streamlined ways to manage their data centers, a $9.9 billion market occupied by heavyweights including IBM, Microsoft and VMware.

By going private, Dell could draw up a new playbook less contingent on satisfying shareholders. It can take steps to invest in the future, and emerge as a stronger company less reliant on PCs and able to claim a bigger slice of the technology industry's profits.

A closely held Dell would also save an estimated $556 million a year in dividend payments. It could use that money for severance payments and restructuring costs.

Debt costs

Without access to public-market capital, buying upstart firms with compelling technology becomes harder. Financing debt will also skim an estimated $1.2 billion a year, according to data compiled by Bloomberg. Dell's debt burden could increase if interest rates rise.

One of the people likely to play a key role in reshaping Dell is Marius Haas, recruited in August after Michael Dell pressed him to join. A 45-year-old Dutch national, Haas arrived after a year as an adviser at KKR & Co., and previously led mergers and acquisitions at Hewlett-Packard under former CEO Mark Hurd.

Haas is trying to inject Dell with more urgency to pair storage and networking gear with the growing server business. Selling 2 percent more of high-margin gear with servers would add $1.2 billion in annual sales, said Haas.

Haas said he's been negotiating with Hurd, now Oracle's co-president, to sell more Oracle database sales that run on Dell machines. About 60 percent of Oracle currently runs on Hewlett-Packard servers.

Selling servers

The enterprise efforts have paid off so far, with Dell emerging as one of the world's biggest makers of servers used to run websites, process financial transactions and analyze business data. During the third quarter, Dell sold about 565,000 mainstream Intel-based servers, according to Gartner - just 65,000 less than market leader Hewlett-Packard.

Dell is poised to be No. 1 this year in the server market, its CEO said at a customer conference in December, giving the company a broad platform to pitch customers on its storage and networking products.

Gaining a larger share in enterprise computing won't be easy. A sizable portion of the server market has evaporated in recent years as huge volume customers such as Google and Facebook buy directly from no-name manufacturers.

While putting more emphasis on data centers, Dell will need to grapple with what to do with PCs, an ailing division that accounts for about half of sales, according to Shaw Wu, an analyst at Sterne Agee & Leach Inc.

Within the PC market, Samsung Electronics, Lenovo Group and Asustek Computer are challenging Dell at the lower end of its business, while demand for Apple's iPads and higher-end Macs remains buoyant.